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Thursday, September 30, 2010

Anatomy of a Deal

Let's say you're a three or four year old company that believes that it has a unique material, in addition to some weak "me too" products. You license your cervical plate and biologics. In order to execute something on a grand scale, you need to raise capital, let's say $30 million in private equity and a debt facility.You issue a new class of Preferred Stock to your new investors with post money valuation. In addition, the investors receive warrants to purchase X amount of shares of Common Stock. There most likely is a conversion clause, a qualified IPO, redemption, anti-dilution protection, voting rights, liquidation preference, first offer rights, realignment of the BOD, registration rights and a stockholders' agreement. Once the minutiae is take care of, what's your next move?

Prior to closing the deal, you performed due diligence on multiple early growth stage companies with the intent of acquiring one of them. In all likelihood, the candidates included Atlas, Choice, Custom, X-Spine and Life Spine. The acquisition would not be predicated on quality of a specific portfolio, it would be centered around who can you buy for the least amount of cash up front, and back load the deal with stock so that in the event you can successfully take your company public, there would be a windfall, not only for yourself, but potentially for the seller.

So what was the deal? Why did someone bite at the bait, while others cut and run? Contingent upon how you structure the term sheet, it was a cash and stock deal. The company that sold, took the bait for numerous reasons. In all likelihood, U.S. Spine was financially distressed, incurring debt, generating mediocre sales, and understanding that in this climate, raising capital was next to impossible with a "me too" portfolio. At best, the upfront payout was probably equivalent to sales, if not less, broken up into term payments. It was a percentage of the cash offering with the stipulation to pay it out over a period of time. The $30 million that was raised will probably be used to acquire another company, reorganize the management team, and develop a larger manufacturing facility. It also left a few dollars to buy salt and pepper shakers to spice up your spine. TSB wants to know, who is the next acquisition target?

You buy the company that is willing to have their surgeon owners sign on the dotted line to say they will use their old technology for x number of years at y cost. Who has had the "For Sale" sign in their yard for the longest and who desperately wants to cash out? Face it, some of these companies were originally started, not to build a company, but to sell their I.P. So, whoever has the shortest skirt, shows the most clevage and comes to the party a little drunk will be the next notch on the belt.

Anyone building a company hoping to sell it based on surgeon consulting agreements and weak IP is in for a rude awakening on valuation discussions with a potential acquirer. To get much of anything you had better have good IP, sales that will continue after the sale and a good quality system. Big strategic acquirers are real picky. Too many companies don't build the foundation from the ground up. Everyone wants to cut corners or so it seems to me.

Seriously, Spinecraft? Their initial investors don't even use the knock offs unless they are begged or have a gap between their other consulting deals. Clearly not an acquisition target and soon to be one of the companies that will perish in the natural selection process that is happening.

If X=Spine has a nice ISP device, it would only make sense to fill a void that exists in both Amedica's and US Spine's portfolios. The X-Spine cervical plate is functional and has some traction, US Spine's pedicle screw is vanilla with no problems, and Amedica will continue to drive SiN regardless whether there is applicability or not. If I bucked up $15 million in this economy, I would expect an IPO down the road or there would be some people swimming with the fishes. The only question that remains is whether the offer is worth entertaining.

You've never heard of SpineCraft because they did 3 million in sales last year. One of their surgeon investors told me this over dinner...ummm, yeah, where do we sign up to buy this company? Toys R Us?

SpinalMotion is looking for solid distributors to join us for the launch next year of our two artificial discs, once they are approved. We've started to cover some territory already just in lining up groups and there's a lot of great distributor partners we would like to meet and potentially work with. Please see me at my booth next week at NASS if you're interested: Charles Gilbride, Senior Director of Marketing, SpinalMotion, Booth #1273, (650) 302-7504. Thank you.

That one of the ankle biters is looking to pony up some significant cash to buy another ankle biter is amazing. These small companies are not offering anything of substance to the market, particularly Amedica. Factor in downward pressure on pricing, insurance fighting reimbursemant on surgery for back pain(interbody fusion), increasing difficulty of the regulatory pathway, and rumblings from the OIG and DOJ about physician/industry relationships, why would anyone throw money at these companies?

SeaSpine could be a good acquisition from the stand point that word on the street is Haider is looking to cash out his portion. He has a house in Dubai he has to pay for. Nothing great product wise but they probably will do $40-$45 million this year.